Countries have no control over the price of oil, but they can push it in one direction or another. And the latest signals from some of the top oil market policymakers indicate they want prices to stay above $80, according to
bank of America
analyst Francisco Blanch.
That’s a shift from the long-term assumption about oil prices that could benefit energy companies and their investors. Historically, policymakers have looked to keep oil above $60 — a level that will prompt producers to drill more of it, while keeping the cost of gasoline low enough not to slow the economy.
For the first time, OPEC and its allies decided this month to jointly cut production, even though oil prices were above $90. The cut is modest, but it shows that the group is still nervous about falling demand and prices.
In addition, the US is increasingly using its Strategic Petroleum Reserve to influence oil prices and there are signs that officials are also targeting slightly higher oil.
The Department of Energy has been selling oil from the reserve for months to increase supply and lower prices. Those sales are expected to end next month, raising the question of when the US will eventually move to buying more oil to replenish its reserve.
A report last week from Bloomberg said officials are considering buying back oil when prices fall below $80. That would indicate that they see $80 as a reasonable price for oil, or at least a relatively “attractive” price to top up storage tanks. Earlier this month, West Texas Intermediate, the benchmark for US-traded oil, fell to $81. On Monday, Brent oil, the international benchmark, was trading around $91.
“Combined with rising global inflation, what do US energy and OPEC+ policies mean for future oil prices?” Blanc wrote. “In our opinion, that means $80 is the new $60 for Brent.”
Buying back oil for the strategic reserve when it falls below $80 would signal to producers that the government wants to keep prices high enough to encourage more drilling. The government must maintain a delicate balance, keeping prices high enough that drillers don’t run away, while also ensuring that prices don’t get too high and fuel prices rise again.
In response to the Bloomberg story, the Energy Department denied that there is a “trigger price.” It said it does not expect to buy oil anytime soon.
Oil could rise well above $80 next year, Bank of America predicts. Blanch, who is more optimistic than other analysts on oil prices, expects prices to average $100 next year, “with upside risk of Russian supply disruptions and downside risk of a macro slowdown.”
For most oil producers, any price above $60 is profitable. But if $80 becomes the new bottom, oil investors can look forward to years of solid free cash flow and dividend hikes. Bank of America analyst Doug Leggate likes
(OVV) and Hess (HES). He also likes
(COP) as more “defensive” choices.
Write to Avi Salzman at: [email protected]